| arcel Co. is growing quickly. Dividends are expected to grow at a 17 percent rate for the next 3 years, with the growth rate falling off to a constant 4 percent thereafter. |
| Required: |
| If the required return is 8 percent and the company just paid a $2.50 dividend. what is the current share price? (Do not round your intermediate calculations.) |
a. $89.63
b. $91.46
c. $85.34
d. $88.28
e. $93.29
Answer :
b. $91.46
Working notes for the above answer is as follow
= D3 (1 + g) / (R – g) = D0 (1 + g1)3 (1 + g2) / (R – g)
P3 = $2.5(1.17)3(1.04) / (.08 – .04)
P3 = $104.105
The price of the stock today is the PV of the first three dividends, plus the PV of the Year 3 stock price. The price of the stock today will be:
P0 = $2.50(1.17) / 1.08 + $2.5 (1.17)2 / 1.082 + $2.5(1.17)3 / 1.083 + $104.105 / 1.083
P0 = $91.46
